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Traditional IRA 101

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Definition

A traditional IRA is a savings account where taxes are postponed. You do not have to pay taxes on the account’s money until you began to withdraw from it after you retire.

Traditional IRA vs 401(k)

Having a traditional IRA is better than having a 401(k) when it comes to the tax deferring factor. Unlike a 401(k) where you pay taxes on the earnings yearly, you can allow the compound interest to build without being taxed. Therefore, you can make money quicker with a traditional IRA than you can with a taxable account, such as a 401(k).

Limits

If you do not want to be penalized, you must wait until you are 59.5 years old to withdraw money from your traditional IRA. If you take money from your account before the designated age, you will be taxed 10% more on the early disbursement.

Lastly, if you wait to withdraw money from the account past age 59.5 years old, you can still earn money on the interest. However, you must start receiving money from your traditional IRA by age 70.5 years old.

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